Stock Pickers Poised to Reap Gains as Correlation Unwind Deepens

(Bloomberg) -- Life is about to get even easier for stock pickers who have started to reap rewards from a drop in correlations.

Stocks are increasingly moving in a different direction to their sectors, boosting potential gains for investors who select individual companies that outperform, according to strategists at Sanford C Bernstein Ltd. including Alla Harmsworth.

Although relationships between industries have weakened since the second half of last year, until now the correlation between individual stocks within sectors has remained elevated, the analysts said. This suggests that fund performance has been dominated by choosing the correct group, leaving a relatively limited opportunity for managers to add value by equity picking.

“The alpha-generating opportunity set for active managers is getting wider still,” the strategists said in a research note published on Friday. Investors will have “more room to add value by discriminating between the potential winners from the potential losers within each sector based on their fundamental differences,” they said.

‘Particularly Ripe'

Consumer discretionary and staples, technology, health care and industrials appear to be “particularly ripe” with stock-picking opportunities in both Europe and the U.S., Bernstein said.

Active fund managers started outperforming in 2017 after lagging the market for years. Bernstein's sample of European portfolio managers has beaten its benchmark by an average of 3.6 percent so far this year, after a 6 percent underperformance in 2016.

To contact the reporter on this story: Cormac Mullen in Dublin at cmullen9@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Natasha Doff, Alex Nicholson